Global Imbalances and Currency Wars at the ZLB

Transcription

1 Global Imbalances and Currency Wars at the ZLB Ricardo Caballero 1 Emmanuel Farhi 2 Pierre-Olivier Gourinchas 3 1 MIT & NBER 2 Harvard & NBER 3 UC Berkeley & NBER Pacific Basin Research Conference, San Francisco, November / 37

2 Global Imbalances % OF WORLD GDP 2.50 Asian Crisis Financial Crisis Eurozone Crisis U.S. European Union Japan Oil Producers Emerging Asia ex-china China Rest of the world Figure: Current Account, % of World GDP 2 / 37

3 Global Interest Rates (Short and Long) percent 25 Financial Crisis Eurozone Crisis percent 18 Financial Crisis Eurozone Crisis U.S. Eurozone U.K. Japan (a) policy rates U.S. Germany U.K. Japan (b) 10-year nominal yields 3 / 37

4 Output Gap (Advanced Economies), percent 6 Financial Crisis Eurozone Crisis United States Eurozone Japan United Kingdom 4 / 37

5 Global Exchange Rates percent 30 Abenomics ECB QE Euro-dollar Yen-dollar Yuan-dollar The figure reports ln(e/e 2007m1) where E denotes the foreign currency value of the dollar. 5 / 37

6 U.S. Interest Rate and Equity Risk Premium Percent annualized 28 Financial Crisis One-year Treasury yield One year ahead ERP Source: one-year Treasury yield: Federal Reserve H.15; ERP: Duarte & Rosa (2015). 6 / 37

7 Goal Simple model to shed light on these developments: transparent, parsimonious closed-form solutions Capital flows, exchange rates, unemployment and risk premia Away from, or at Zero Lower Bound (ZLB) Policy 7 / 37

8 Main Ideas ZLB tipping point for Global Imbalances (benign to malign): no ZLB propagation of low interest rates via CA surpluses ZLB propagation of recessions via CA surpluses Regime of increased policy interdependence (± spillovers): FX (zero sum) inflation targets (positive sum) government spending (positive sum) public debt issuance (positive sum) helicopter drops of money (positive sum) some forms of QE (positive sum) 8 / 37

9 Literature Review Four strands of related literature: Asset shortages and global imbalances (Bernanke (2005), Caballero et al (2008), Mendoza et al (2009)) Liquidity traps in NK models & open economy (Keynes (1936), Krugman (1998), Eggertsson & Woodford (2003), Eggertsson & Krugman (2012), Werning (2012), Jeanne (2009), Cook & Devereux (2013), Benigno & Romei (2014)) Secular Stagnation (Summers 2014), Caballero & Farhi (2015), Eggertsson & Mehrotra (2014)) Safety and public debt (Stein (2012), Gorton & Ordonez (2014), Caballero & Farhi (2015), Barro and Mollerus (2015)) Closest paper to ours: Eggertsson, Mehrotra, Sing & Summers (2015). 9 / 37

10 Basic Model: Two Countries, no Risk Home and Foreign Endowment X of H good grows at rate g Endowment X of F good grows at rate g Relative size (constant): x = X X +X. 10 / 37

11 Home Assets Dividends δx capitalized by Lucas trees: rate of depreciation ρ rate of new trees creation ρ Public debt D = dx financed by taxes τ 11 / 37

12 Home Agents OLG perpetual youth with birth/death Poisson rate θ; Earn income at birth, save it, and consume at death; Consumption shares on (H,F): (x, 1 x); Income of newborns: (1 τ)(1 δ)x + value of new trees 12 / 37

13 Financial Development/Securitization Capacity Interpret δ as financial development/securitization capacity, not capital share Only small part of capital income pledgeable to outside investors as dividend on tradable assets Depends on financial development/securitization capacity Interpret ρ as technological churn and expropriation risk V t /PV t depends on δ and ρ PV t = V t = δ t t X s e s r udu t ds X t e s t (ru+ρ)du ds 13 / 37

14 Nominal Rigidities and Monetary Policy Competitive CES final good sector in each country Reinterpret endowment as non-traded input transformed into variety of intermediate good sold monopolistically H prices rigid in H currency, F prices rigid in F currency (PCP) accommodate demand at posted price Capacity utilization ξ [0, 1] Truncated Taylor rule: i = max{r n ψ(1 ξ), 0} Real interest rate r = i 14 / 37

15 Foreign Same as H but different parameters: Financial development/securitization capacity: δ δ Public debt to GDP ratio d d and taxes τ τ Other differences (extensions): demographics and credit constraints (savers/borrowers) securitization capacity & demand for safe assets inflation targets 15 / 37

16 Equilibrium Equations (along BGP) Asset pricing (V : value of H trees in H currency) r w V = ρv + δξx r w V = ρv + δ ξ X Wealth accumulation (W : H financial wealth in H currency): W = gw = θw + (1 δ)(1 τ)ξx + r w W + (ρ + g)v W = gw = θw + (1 δ )(1 τ )ξ X + r w W + (ρ + g)v Government budget constraints: (r w g)d = τ(1 δ)ξx (r w g)d = τ (1 δ )ξ X Goods market clearing: (E: nominal exchange rate) xθ(w + EW ) = ξx (1 x)θ(w + EW ) = Eξ X 16 / 37

17 ZLB Complementary Slackness No liquidity trap r w > 0 and ξ = ξ = 1 Global liquidity trap All or none world r w = 0 and ξ, ξ 1 17 / 37

18 No Liquidity Trap World interest rate as average of autarky interest rates r w = r w,n = ρ + δθ 1 θ d with r a,n = ρ + δθ 1 θd and r a,n = ρ + δ θ 1 θd Net Foreign Assets and Current Account NFA X = (1 θd)(r w r a,n ) (g + θ r w )(ρ + r w ) and CA X = g NFA X Exchange rate E = 1 18 / 37

19 Standard Metzler Diagram - Global The global equilibrium interest rate r w is such that world financial markets are NFA in equilibrium: = x NFA NFA + (1 x) = 0. X X X 19 / 37

20 Global Liquidity Trap World interest rate r w = 0 Fixed-point equations for ξ and ξ ξ = ξ = 1 E θ gδ [xξ(1 + g + θ ρ ) + (1 x)eξ (1 + gδ ρ ) + xgd + (1 x)gd ] θ gδ [xξ(1+ g + θ ρ )+(1 x)eξ (1+ gδ ρ )+xgd +(1 x)gd ] Multiple equilibria indexed by E...(Kareken-Wallace) E = ξ ξ 20 / 37

21 Global Liquidity Trap Output gaps as FX-weighted averages of autarky output gaps ξ = x 1 δθ ρ 1 δθ ρ ξ a,l + (1 x) 1 δ θ ρ 1 δθ Eξ a,l ρ with ξ = x 1 δθ ρ 1 δθ ρ θ ρ 1 E ξa,l + (1 x) 1 δ 1 δθ ρ ξ a,l ξ a,l = θd 1 δθ ρ r a,n ρ and ξ a,l = θd r a,n 1 δ θ ρ ρ Net Foreign Assets and Current Account NFA X δθ (1 ρ = )(ξ ξa,l ) g + θ and CA X = g NFA X 21 / 37

22 Output Determination in the Global ZLB figure reports Home (ξ) and Foreign (ξ ) output at the global ZLB, for different values of the exchange rate E [E, Ē]. 22 / 37

23 Metzler Diagram in Quantities - Global Given E, ξ is such that world financial markets are in equilibrium: NFA (E) = x NFA NFA + (1 x)e = 0. X X X 23 / 37

24 Currency Wars and Reserve Currency Paradox E determined by market coordination or FX intervention (peg) Beggar-thy-neighbor devaluations (zero-sum) E = ξ ξ CA X Reserve currency paradox 24 / 37

25 Inflation Old Keynesian Phillips curves (downward sticky prices ) [π H,t + κ 0 + κ 1 (1 ξ t )](1 ξ t ) = 0 [π F,t + κ 0 + κ 1(1 ξ t )](1 ξ t ) = 0 Taylor rules with inflation targets π > 0 and π > 0 i t = max{0, r n t + π + φ(π H,t π)} i t = max{0, r n t + π + φ (π F,t π )} 25 / 37

26 Inflation With r w,n < 0, multiple equilibria with different TOT: S = EP F P H No liquidity traps equilibrium (i > 0, i > 0) if inflation targets high enough: r w,n + min{ π, π } > 0 Global liquidity trap equilibrium (i = i = 0) with deflationary spiral at world level, more wage flexibility deeper recession at country level, more wage flexibility shallower recession Asymmetric liquidity trap equilibrium (i = 0, i > 0) no recession in one country worse recession in the other Inflation targets (positive sum) vs. FX interventions (zero sum) 26 / 37

27 Public Debt and Helicopter Drops of Money Public debt expansion (positive sum)... d = ξ ξ CA X...but not if used to finance asset purchases (different in model with safe and risky assets) Larger multiplier if higher private asset supply δ Equivalent to helicopter drops of money 27 / 37

28 Government Spending Government spending (positive sum) G = ξ ξ CA X Domestic multiplier > 1 in SR (net asset supply boost + inflation boost through stimulus) More foreign leakage in LR (TOT appreciation) 28 / 37

29 More in Paper Home bias Non-unitary trade elasticities Borrowers and savers aging deleveraging Safe assets and global safe asset shortages (zoom in) 29 / 37

30 U.S. MPK 30 / 37

31 U.S. Interest Rate and Equity Risk Premium Percent annualized 28 Financial Crisis One-year Treasury yield One year ahead ERP Source: one-year Treasury yield: Federal Reserve H.15; ERP: Duarte & Rosa (2015). 31 / 37

32 Safe Asset Imbalances % OF WORLD GDP 20 Asian Crisis Financial Crisis Eurozone Crisis U.S. Euro Area Japan Oil Producers Emerging Asia ex China China Switzerland U.K. Rest of the World Note: Net Safe positions defined as the sum of Official Reserves (minus Gold), Portfolio Debt and Other Assets, minus Portfolio Debt and Other Liabilities. Source: Lane & Milesi-Ferretti (2007). Regions defined as in Figure / 37

33 Safe Assets and Global Safe Asset Shortages Endogenous risk premia, increases at the ZLB Links reserve currency paradox and exorbitant privilege Can have ZLB in one country but not other ( real interest rates) Policy: QE issue debt/purchase risky (not safe!) assets (positive sum) support private securitization capacity (positive sum) forward guidance (reduced effectiveness) 33 / 37

34 Safe Assets: Shocks and Preferences Disaster shock /w Poisson rate λ 0: output drops µ < 1 Set d = d = 0 and δ = δ Fraction α Knightians (infinitely risk averse), 1 α Risk Neutral. Knightians have full home bias. Neutrals have some home bias 34 / 37

35 Safe Assets: Securitization & Tranching Fraction φ < 1 of H dividend tranched and recombined.: Poisson puts (pay nothing until Poisson shock) Poisson calls (pay only until the Poisson shock) Knightians invest in safe assets combining puts and calls Neutrals invest in the rest Constrained regime: safe assets are scarce & Knightians price safe assets at the margin (safety premium). 35 / 37

36 Modified UIP and Risk Premia Fix exchange rate immediately after the shock E + No-arbitrage requires: r w r K r w r K = E E + modified UIP equation: the country with a high safety premium (r K < r K ) has a currency that will appreciate when the shock occurs (E > E + ). Reserve Currency Paradox: if Home s currency is expected to appreciate in bad times (E > E + ), then r K < r K and Home is more likely to experience a liquidity trap if φ > φ then NFA/X < 0: exorbitant privilege. Metzler diagram in safe assets 36 / 37

37 Conclusion This paper: Model of global and local, permanent or persistent liquidity traps (secular stagnation) Traps in one country propagate to other countries Powerful beggar-thy-neighbor effects vis FX Model accounts for decline in risk-free rate and increase in risk premia Paradox of the reserve currency: reserve countries suffer a disproportionate share of the trap 37 / 37